Finding Middle Ground in the Robo-Adviser Debate

The debate often crystalizes around the controversial but
ill-defined notion of the “robo-adviser,” explains Jeff Eng, director of
retirement income solutions at Russell Investments, and whether investors will ever
be comfortable with fully digitized financial advice. Some in the industry say
yes—the efficiency and scalability of fully digital advice will eventually push
traditional advisers out of the way. Others say no—believing digital advice will
never perform as well as truly one-on-one, long-term consultation between
investor and trusted adviser.

It’s a familiar debate, Eng notes, but it’s also unfairly diametric.
Eng says the industry is already creating innovative solutions that merge digital
and traditional advice in the best interest of end investors. Unlike some industry
watchers, Eng predicts a more symbiotic relationship between technology firms and
traditional advice providers.

“For Russell, a big part of this is the Adaptive Retirement Accounts
[ARAs],” Eng tells PLANADVISER, explaining that the ARAs
grew out of a partnership with Chicago-based digital adviser and technology
provider NextCapital. Eng suggests the ARAs can help retirement specialist advisers
strike a middle ground between traditional and digital advice delivery, leading
to improved outcomes for plan participants while keeping the adviser’s core business model relevant.

In basic terms, the ARAs allow an adviser to leverage recordkeeping
data to implement things like automatic portfolio rebalancing, customized glide
path development, real-time retirement readiness reporting, and other helpful
digital solutions that make servicing a large number of retirement plan
participants much easier, Eng says. But crucially, the system is open architecture—meaning
the ARAs do not come along with a preprogramed list of proprietary investments
or premixed funds that must be used by participants. Instead, ARA portfolios
are built from a retirement plan’s existing fund menu, Eng explains, which has
likely been built with fiduciary input from an adviser.

“We know a lot of our client advisory firms are serving as
3(21) fiduciaries or as 3(38) fiduciaries for their retirement plan clients.
This means a lot of them are doing the due diligence and ongoing monitoring of the
underlying funds that make up the core retirement plan menu, and that’s a big
part of their traditional value proposition,” Eng notes. “We’re looking to build
on that—because that’s the appropriate role of the adviser.”

Under the ARA solution, advisers continue to do fiduciary due
diligence and fund monitoring on the plan’s menu while allowing Russell to handle
key components of individual client servicing, such as automatic quarterly
portfolio rebalancing and the creation of individualized glide paths.

“We’re
just going to take over the client service components to help participants take
full advantage of the funds that are being selecting by the adviser,” Eng says.
“It’s really another great value-add for the adviser to bring to the table.”

Eng says Russell envisions the ARAs becoming popular for advisers
to offer as a digitally supported qualified default investment alternative (QDIA)—noting
that Ingham Retirement Group recently re-enrolled about 40 of its own employees
into Russell Adaptive Retirement Accounts. Ingham is also beginning to offer
the ARAs to clients via its advisory platform, Eng adds.

“This service highlights the fact that advisers play a critical
role in helping their clients,” Eng says. “We want to be able to partner with
them to provide defined contribution plan investors with the best services possible.
We’re able to step in and say, ‘Here’s exactly how each
participant should be using this great lineup that the adviser has built. We're here to make sure each participant is serviced appropriately.’”

Dirk Quayle, president of NextCapital, tells PLANADVISER
that the automated support available through the ARAs means each participant
gets a customized allocation and glide path based on their individual
retirement readiness outlook, as contained in their recordkeeping data.

“The data allows the adviser to know when to do a
transaction, when to make changes to which participants’ holdings,” Quayle
explains. “This can be fully automated, or the system can put up a flag when some
important step needs to be completed or something needs to be monitored more closely by the adviser.”

Both Quayle and Eng suggest the ARAs and other like-minded approaches
to mixing digital and traditional adviser services could spell greater
competition for the growing target-date fund (TDF) industry.

“At Russell, we still believe in TDFs, but we understand
that certain plan sponsors believe in a more customized investment strategy for
their plan participants—often they are looking for improvement above and beyond
in terms of things like retirement readiness and retirement income,” Eng says. “For these sponsors,
the ARAs really make sense to bring that next level of customization.”

Quayle suggests this approach also solves another common
problem that advisers face in adopting premixed TDFs.

“When a TDF is deployed off the shelf as the QDIA—very
rarely is it going to be personalized to the real plan participant population,
and it’s not going to use the individual funds the adviser has picked,” he
explains. “So for the adviser, with the ARAs you get the double benefit of
having better customization in the QDIA while also getting
to use the fund menu you have already put so much time and effort into building
and monitoring.

“This
technology is designed really to let the adviser get and stay involved as much
as they want,” Quayle concludes. “They have options—they can take a more hands
off role or a more hands on role, depending on their unique business model. In either case, they
definitely maintain a stronger relationship with the ARA solution than a lot of
other digital managed account opportunities that are out there.”